KAPIL KUMAR 10PMB047

1.VENTURE CAPITAL FINANCING

Venture capital financing is a type of financing by venture capital: the type of private equity
capital is provided as seed funding to early-stage, high-potential, growth companies and more
often after the seed funding round as growth funding round (also referred as series A round) in
the interest of generating a return through an eventual realization event such as an IPO or trade
sale of the company.

To start a new startup company or to bring a new product to the market, the venture may need to
attract financial funding. There are several categories of financing possibilities. If it is a small
venture, then perhaps the venture can rely on family funding, loans from friends, personal bank
loans or crowd funding

For more ambitious projects, some companies need more than what mentioned above, some
ventures have access to rare funding resources called angel investors. These are private investors
who are using their own capital to finance a ventures’ need. The Harvard report by William R.
Kerr, Josh Lerner, and Antoinette Scholar tables’ evidence that angel-funded startup companies
are less likely to fail than companies that rely on other forms of initial financing. Apart from
these investors, there are also venture capitalist firms who are specialized in financing new
ventures against a lucrative return.

When a venture approaches the last one, the venture is going to do more than negotiating about
the financial terms. Apart from the financial resources these firms are offering; the VC-firm also
provides potential expertise the venture is lacking, such as legal or marketing knowledge. This is
also known as smart money.

Venture Capital Financing Process

As written in the previous paragraph, there are several ways to attract funding. However in
general, the venture capital financing process can be distinguished into five stages;

1. The seed stage

2. The Start-up stage
3. The Second stage
4. The Third stage
 5. The Bridge/Pre-public stage

Of course the stages can be extended by as many stages as the VC-firm thinks it should be
needed, which is done in practice all the time. This is done when the venture did not perform as
the VC-firm expected. This is generally caused by bad management or because the market
collapsed or a bit of both. The next paragraphs will go into more details about each stage.

2. MARKET VALUE ADDED (MVA)

Market Value Added (MVA) is the difference between the current market value of a firm and
the capital contributed by investors. If MVA is positive, the firm has added value. If it is
negative, the firm has destroyed value. The amount of value added needs to be greater than the
firm's investors could have achieved investing in the market portfolio, adjusted for the leverage
(beta coefficient) of the firm relative to the market.

The formula for MVA is:

where:

 MVA is market value added

 V is the market value of the firm, including the value of the firm's equity and debt K is the
capital invested in the firm

MVA is the present value of a series of EVA values. MVA is economically equivalent to the
traditional NPV measure of worth for evaluating an after-tax cash flow profile of a project if the
cost of capital is used for discounting.

3. ECONOMIC VALUE ADDED (EVA)

In corporate finance Economic Value Added or EVA is an estimate of a firm's economic profit
- being the value created in excess of the required return of the company’s shareholders - where
EVA is the profit earned by the firm less the cost of financing the firm’s capital. The idea is that
shareholders gain when the return from the capital employed is greater than the cost of that
capital; see corporate finance: working capital management. This amount can be determined,
among other ways, by making adjustments to GAAP accounting, including deducting the
opportunity cost of equity capital.

EVA is Net Operating Profit After Taxes (or NOPAT) less the money cost of capital. Any value
obtained by employees of the company or by product users is not included in the calculations.
The basic formula is:

where:

 , is the return on invested capital (ROIC);

 is the weighted average cost of capital (WACC);
 is capital employed;
 NOPAT is the Net Operating Profit After Tax, with adjustments and translations for the
amortization of goodwill, the capitalization of brand advertising and others.
 EVA Calculation
 EVA = (r-c) x Capital
 EVA = (r x Capital) – (c x Capital)
 EVA = NOPAT - c x Capital
 EVA = operating profits – a capital charge
 where:
 r = rate of return, and

 c = cost of capital, or the weighted average cost of

capital.
  NOPAT is profits derived from a company’s operations after taxes but before financing
costs and noncash-bookkeeping entries. It is the total pool of profits available to provide
a cash return to those who provide capital to the firm.
 Capital is the amount of cash invested in the business, net of depreciation. It can be
calculated as the sum of interest-bearing debt and equity or as the sum of net assets less
noninterest-bearing current liabilities.
 Capital charge is the cash flow required to compensate investors for the riskiness of the
business given the amount of capital invested.
 The cost of capital is the minimum rate of return on capital required to compensate debt
and equity investors for bearing risk.
 Another perspective on EVA can be gained by looking at a firm’s Return on Net Assets
(RONA). RONA is a ratio that is calculated by dividing a firm’s NOPAT by the amount
of capital it employs (RONA = NOPAT/Capital) after making the necessary adjustments
of the data reported by a conventional financial accounting system.
 EVA = (Net Investments)(RONA – Required minimum return)
 If RONA is above the threshold rate, EVA is positive.

4. OPTIONS

In finance, an option is a derivative financial instrument that establishes a contract between two
parties concerning the buying or selling of an asset at a reference price. The buyer of the option
gains the right, but not the obligation, to engage in some specific transaction on the asset, while
the seller incurs the obligation to fulfill the transaction if so requested by the buyer. The price of
an option derives from the difference between the reference price and the value of the underlying
asset (commonly a stock, a bond, a currency or a futures contract) plus a premium based on the
time remaining until the expiration of the option. Other types of options exist, and options can in
principle be created for any type of valuable asset.

An option which conveys the right to buy something is called a call; an option which conveys the
right to sell is called a put. The reference price at which the underlying may be traded is called
the strike price or exercise price. The process of activating an option and thereby trading the
underlying at the agreed-upon price is referred to as exercising it. Most options have an
expiration date. If the option is not exercised by the expiration date, it becomes void and
worthless.

In return for granting the option, called writing the option, the originator of the option collects a
payment, the premium, from the buyer. The writer of an option must make good on delivering
(or receiving) the underlying asset or its cash equivalent, if the option is exercised.

An option can usually be sold by its original buyer to another party. Many options are created in
standardized form and traded on an anonymous options exchange among the general public,
while other over the counter options are customized ad hoc to the desires of the buyer, usually by
an investment bank.

OTHER OPTION TYPES

Another important class of options, particularly in the U.S., are employee stock options, which
are awarded by a company to their employees as a form of incentive compensation. Other types
of options exist in many financial contracts, for example real estate options are often used to
assemble large parcels of land, and prepayment options are usually included in mortgage loans.
However, many of the valuation and risk management principles apply across all financial
options.

Option valuation

The theoretical value of an option is evaluated according to any of several mathematical models.
These models, which are developed by quantitative analysts, attempt to predict how the value of
an option changes in response to changing conditions. For example how the price changes with
respect to changes in time to expiration or how an increase in volatility would have an impact on
the value. Hence, the risks associated with granting, owning, or trading options may be
quantified and managed with a greater degree of precision, perhaps, than with some other
investments. Exchange-traded options form an important class of options which have
standardized contract features and trade on public exchanges, facilitating trading among
independent parties. Over-the-counter options are traded between private parties, often well-
capitalized institutions that have negotiated separate trading and clearing arrangements with each
other.

5. FUTURE

In finance, a futures contract is a standardized contract between two parties to exchange

a specified asset of standardized quantity and quality for a price agreed today (the futures
price or the strike price) but with delivery occurring at a specified future date. The
contracts are traded on a futures exchange. The party agreeing to buy the underlying asset
in the future, the buyer of the contract, is said to be "long", and the party agreeing to sell
the asset in the future, the seller of the contract, is said to be "short". The terminology
reflects the expectations of the parties -- the buyer hopes the asset price is going to
increase, while the seller hopes for a decrease.

1. In many cases, the underlying asset to a futures contract may not be traditional
"commodities" at all – that is, for financial future, the underlying asset or item can be
currencies, securities or financial instruments and intangible assets or referenced
items such as stock indexes and interest rates.

2. The future date is called the delivery date or final settlement date. The official price
of the futures contract at the end of a day's trading session on the exchange is called
the settlement price for that day of business on the exchange.

3. A closely related contract is a forward contract; they differ in certain respects. Futures
contracts are very similar to forward contracts, except they are exchange-traded and
defined on standardized assets.

4. Unlike forwards, futures typically have interim partial settlements or "true-ups" in

margin requirements. For typical forwards, the net gain or loss accrued over the life
of the contract is realized on the delivery date.
 5. Unlike an option, both parties of a futures contract must fulfill the contract on the
settlement date. The seller delivers the underlying asset to the buyer, or, if it is a cash-
settled futures contract, then cash is transferred from the futures trader who sustained
a loss to the one who made a profit. To exit the commitment prior to the settlement
date, the holder of a futures position can close out its contract obligations by taking
the opposite position on another futures contract on the same asset and settlement
date. The difference in futures prices is then a profit or loss.

6. Futures contracts, or simply futures, (but not future or future contract) are exchange-
traded derivatives. The exchange's clearing house acts as counterparty on all
contracts, sets margin requirements, and crucially also provides a mechanism for
settlement.

Standardization

Futures contracts ensure their liquidity by being highly standardized, usually by specifying:

 The underlying asset or instrument. This could be anything from a barrel of crude oil to a
short term interest rate.
 The type of settlement, either cash settlement or physical settlement.
 The amount and units of the underlying asset per contract. This can be the notional
amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional
amount of the deposit over which the short term interest rate is traded, etc.
 The currency in which the futures contract is quoted.
 The grade of the deliverable. In the case of bonds, this specifies which bonds can be
delivered. In the case of physical commodities, this specifies not only the quality of the
underlying goods but also the manner and location of delivery. For example, the
NYMEX Light Sweet Crude Oil contract specifies the acceptable sulphur content and
API specific gravity, as well as the pricing point -- the location where delivery must be
made.
 The delivery month.
 The last trading date.
  Other details such as the commodity tick, the minimum permissible price fluctuation

6.FOREIGN EXCHANGE MARKET

The foreign exchange market (forex, FX, or currency market) is a global, worldwide
decentralized over the counter financial market for trading currencies. Financial centers around
the world function as anchors of trading between a wide range of different types of buyers and
sellers around the clock, with the exception of weekends. The foreign exchange market
determines the relative values of different currencies.

The primary purpose of the foreign exchange is to assist international trade and investment, by
allowing businesses to convert one currency to another currency. For example, it permits a US
business to import British goods and pay pound sterling, even though the business's income is in
us dollars. It also supports speculation, and facilitates the carry trade in which investors borrow
low-yielding currencies and lend (invest in) high-yielding currencies, and which (it has been
claimed) may lead to loss of competitiveness in some countries.

In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying
a quantity of another currency. The modern foreign exchange market began forming during the
1970s when countries gradually switched to floating exchange rates from the previous exchange
rate regime, which remained fixed as per the Bretton woods system.

The foreign exchange market is unique because of

 its huge trading volume, leading to high liquidity

 its geographical dispersion;
 its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT
on Sunday until 22:00 GMT Friday;
 the variety of factors that affect exchange rates;
 the low margins of relative profit compared with other markets of fixed income; and
 the use of leverage to enhance profit margins with respect to account size.
As such, it has been referred to as the market closest to the ideal of perfect competition,
notwithstanding currency intervention by central banks. According to the Bank for International
Settlements, as of April 2010, average daily turnover in global foreign exchange markets is
estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume .

 The foreign exchange market is the most liquid financial market in the world. Traders
include large banks, central banks, institutional investors, currency speculators,
corporations, governments, other financial institutions, and retail investors. The average
daily turnover in the global foreign exchange and related markets is continuously
growing. According to the 2010 Triennial Central Bank Survey, coordinated by the Bank
for International Settlements, average daily turnover was US$3.98 trillion in April 2010
(vs $1.7 trillion in 1998). Of this $3.98 trillion, $1.5 trillion was spot foreign exchange
transactions and $2.5 trillion was traded in outright forwards, FX swaps and other
currency derivatives.